Stocks are on sale this holiday season!
One might think the lower prices would attract investors. After all, Black Friday showed the power of low prices as sales this year came in at a record-breaking $9.1 billion. But sale prices for stocks seem to have the opposite effect, as investors have not reacted rapidly to much lower stock valuations found among many publicly traded companies these days.
The result is that many solid stocks are bargains by nearly any measure. Knowing that, investors may want to consider two blue-chip stocks: Alphabet (GOOGL 1.42%) (GOOG 1.43%) and Qualcomm (QCOM 1.62%). Both are available at discounted valuations and are great buy-and-hold-forever candidates. Here's why.
1. Alphabet
Admittedly, the Google parent failed to make itself completely immune to the economic slowdown. With less ad spending, the digital ad pioneer experienced a big drop in its growth rate.
In the third quarter of 2022, Google Advertising's revenue increased by only 2% compared with the same quarter in 2021. That led to overall revenue of $69 billion, an increase of 6% year over year. And investors noted the dramatic slowdown from the 41% revenue growth rate for 2021.
Moreover, its income fell over the same period. The net income of just under $14 billion dropped by more than 26% year over year. An 18% increase in operating expenses, especially the massive increase in research and development spending, lowered operating income. Other expenses, driven mainly by losses on debt and equity securities, brought about a drop in net income.
Nonetheless, advertising is a cyclical business. Much like a downward economic cycle reduced revenue growth, ad spending will likely recover once the economy improves.
Additionally, the company has long planned to diversify revenue away from ads, and to this end, it owns dozens of businesses. While it does not typically break out results for these enterprises, it now reports financials for its cloud infrastructure arm, Google Cloud. In Q3, it reported almost $6.9 billion in revenue, 38% higher than in the same quarter last year.
Since the stock has lost almost one-third of its value over the last year, it has become a more compelling bargain. Investors can now buy it at a price-to-earnings (P/E) ratio of 19, which is well below its 10-year average of 29. Once Alphabet's growth starts to resemble historical levels more closely, it should look more like a no-brainer stock to buy.
2. Qualcomm
Like Alphabet, Qualcomm fell victim to the worsening economy. As the leading producer of smartphone chipsets, it had benefited from a 5G upgrade cycle. However, as consumer spending slowed in 2022, more people delayed their upgrade to 5G. Additionally, Qualcomm spent more diversifying into areas such as the Internet of Things and automotive to reduce its dependence on the smartphone market. While this could look like a visionary decision in the long run, such a change does bring uncertainty.
Furthermore, China accounted for 65% of the company's revenue in fiscal 2022 (which ended Sept. 25). Considering turmoil inside China related to COVID-19 and geopolitical tensions with the U.S., Qualcomm's dependence on China is rightly perceived as a concern.
Still, fiscal fourth-quarter revenue increased by only 22% over the previous 12 months to $11 billion, well below the 32% revenue growth rate during fiscal 2022. Net income of $3 billion rose by only 3% during the period as rising costs and expenses and lower investment gains weighed on earnings.
Amid the lagging performance, Qualcomm's stock lost more than 30% of its value over the last 12 months.
But that presents an opportunity for new buyers. Qualcomm's P/E ratio now stands at 11. Of the major semiconductor stocks, only Intel sells at a lower valuation, and Intel is losing its status as an industry leader. At its current level, that earnings multiple should price in any concerns about the stock and expand as smartphone sales recover.
